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Nigeria’s Oil Palm Sector - An Investment Case for OKOMUOIL and PRESCO

Stock & Analyst Updates	4168 VIEWS
Stock & Analyst Updates
4168 VIEWS

Tuesday, February 12, 2019 12:58 PM / Afrinvest Research

Following the release of our report on Nigeria’s oil palm sector where we opined that the industry is keenly positioned to soar further over the coming years (as investments in burgeoning milling and refining capacity by listed sector players will crystallize in expanded revenues and profitability), we are pleased to pitch the investment opportunity in OKOMUOIL and PRESCO to you. In the report, we suggested that the sector has ridden on positive government support since 2015 as oil palm import restrictions enhanced the premium pricing opportunity for players, while the sector also enjoys the favourable posture of federal government towards providing low cost capital financing for the agricultural sector compared with other sectors in Nigeria.

Okomu Oil Palm Plc… We Recommend “BUY”

For Okomu Oil Palm Plc, we expect oil palm and rubber trees on about 8,809 hectares and 1,989 hectares to mature within our forecast period. The company’s management revealed plans of expanding its milling capacity to 75.0 FFB MT/hour in FY:2019 and then reach 150.0 FFB MT/hour by FY:2022. This indicates an opportunity for growth in company revenues and overall profitability, as we expect the company’s cost containment strategy to continually deliver a slow pace of expansion in costs.

Specifically, we note that the business connectivity to Benin Electricity Distribution Company (BEDC) has led to significant moderation in operating expenses for the company although the company’s intention to power its plantations (plants and factories) via a steam turbine fed by empty fruit brunches (EFB) would further support cost moderation. Thus, we recommend a “BUY” rating on OKOMUOIL with a 12-month target price (TP) of N110.34 (upside potential of 34.6%) and recommend an entry price of N82.0 based on a technical trend analysis.

PRESCO PLC… Our Recommendation is “ACCUMULATE”

PRESCO Plc, which has chosen to specialize in the production of "speciality fats and oil" – RBD and PFAD – enjoys premium pricing on its products. We opine that the company’s profitability, earlier constrained by the weak capacity of its refinery and fractionalisation plant of 100.0 CPO MT/day, would improve following the completion in expanded capacity to 500.0 MT/day in Q4:2019 and hence presents the possibility of an upsurge in output and company’s profitability above sector comparable – OKOMUOIL. Also, we expect oil palm trees on about 7,100 hectares to mature within our forecast period, supporting the expanded refining capacity to focus more extensively on RBD and PFAD sales. Hence, we recommend an “ACCUMULATE” rating on PRESCO with a 12-month target price (TP) of N77.29 (upside potential of 28.8%) and recommend an entry price of N60.0 based on an analysis of its technical trend.